As you might already know, export companies work on very slim margins. And when changes in currency valuation take place, they adjust their prices of course, and some online sellers could be left in a lurch.
We’ve certainly been noticing this. Some of our clients are struggling with higher prices being requested by their suppliers for long running products. Perhaps this has happened to you, and you might be wondering: is this change in price legitimate? Why might the prices go up by 10-20% or more? How is that fair?
Since 2017, the appreciation of the Chinese yuan (RMB) has exceeded the US dollar by 10%, and the spot exchange rate has exceeded 6.28%. So far, in 2018, the RMB appreciation has been even more rapid, far exceeding market expectations. By the end of March, the RMB really took off, and both the offshore and onshore exchange rates against the US dollar approached 6.24 while continuing to trend upward.
The appreciation of the RMB has affected not only small and medium-sized export companies in China, but also some larger companies listed on the stock exchange, and even some of the biggest players… giant export companies all across the globe.
Some export companies have stated that the growth of US orders has been very positive, but the RMB appreciation and rising raw materials costs nearly offset profits. So, where they had to increase prices by 5%-10%, orders from overseas companies (including the US) dropped significantly.
For the specific industries which are highly dependent on the US market, such as electronics, textiles, furniture, machinery, toys and footwear, it’s clear that they are suffering even greater pressure than others to remain profitable. For example, several listed companies exporting electronic products have issued reports stating that big exchange losses have been caused by the appreciation of the RMB exchange rate.
So it’s clear, at least in the short-term, appreciation of the Chinese Yuan weakens the competitiveness of export-oriented enterprises, in the international market, for their prices of goods and services. Click To Tweet
Plus, it increases the exchange losses of the export companies, which in turn will reduce the willingness of companies to export. This may have a deterrent effect on foreign trade exports that are recovering strongly.
According to data from the General Administration of Customs, in January this year, the total value of China’s trade in goods was 2.51 trillion yuan, up 16.2% year-on-year. Among them, exports were 1.32 trillion yuan, up 6%; imports were 1.19 trillion yuan, up 30.2%; trade surpluses were 135.8 billion yuan, narrowing 59.7%.
So what does all this mean for the Amazon seller?
Since export companies already have very slim margins, it makes sense that they’d increase prices on their smaller customers first. That’s just how business works. But it doesn’t mean that you don’t have options.
It may make more sense to invest in other areas, other sources, with Chinese currency no longer pegged to the dollar. In particular, US based sourcing might be a great strategy, to reduce on logistics costs. What about sourcing in Southeast Asia, to reduced raw materials costs?
In India, we’ve seen a strong push toward suppliers directing their attention and efforts toward the domestic market… becoming less and less interested in foreign buyers and the world market. So this may be coming in the Chinese market too, and is something to be aware of as you maximize profits in your own business.
The important thing to remember is that most often you do have options. There are ways that you too can make the changes in currency valuation work for you, or at the very least not impact your bottom line so much.
It pays to be smart, be aware of what’s happening in the global market, and of course how these things affect you. By keeping yourself in the know, you can make your next purchase with confidence, and continue to stay on top of the changes that affect the livelihood of your business.